The Reserve Bank Quarterly Bulletin published yesterday has provided further detail on the highly satisfactory performance of the SA economy in the first quarter. Household spending growth has led the economic recovery and was sustained in the quarter at an above 5% rate. Government consumption spending also grew strongly.
The weakest spot in the economy remained the reluctance of the private sector to add to its plant and equipment. However the consistent run down in inventories had come to a natural end in the fourth quarter of 2010 and a sharp buildup in inventories, from highly depressed levels relative to output saw Gross Domestic Expenditure (GDE) rise by over 8% at an annual rate, much faster than Gross Domestic Output (GDP) that as was previously announced grew by 4.8% in the quarter.
If one is to draw a bottom line on the update provided by the Reserve Bank, it is that the economy is growing satisfactorily enough led by household and government spending. However if these growth rates are to be sustained and improved, as must be the objective of policy, the economy needs a stronger commitment by business to additional capital expenditure and to the provision of more employment. More formal employment would help the housing market and highly depressed construction of housing activity that is labour intensive. A business friendly approach by government and its agencies seems to be an essential and urgent requirement for economic and employment growth.
The almost stagnant money and credit numbers indicate very clearly the lack of demand for plant and equipment and for new homes. They also confirm that the economy is not yet operating at what might be regarded as its growth potential. The balance of trade, including the weakness in demand for imports, also confirms that the economy could be growing faster (given easy access to foreign capital on favourable terms). There is moreover little indication that the economy is picking up momentum.
The concern rather, given recent trends, must be that the economy could easily lose momentum (depending in part on the uncertain state of the global economy and demands for exports). The fragility of business confidence could be another negative influence. The best monetary policy could do in the circumstances, would be leave interest rates well alone and unchanged.
To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View:Daily View: The economy: Steady as it goes